<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _____________
COMMISSION FILE NUMBER: 1-14208
MOSSIMO, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0684524
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
2450 WHITE ROAD, 2ND FLOOR
IRVINE, CALIFORNIA 92614 - 6250
(Address of principal (Zip Code)
executive offices)
(949) 797-0200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for any shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Common Stock, par value 15,036,897
$.001 per share (Outstanding on May 3, 1999)
(Class)
Exhibit Index on Page 14
<PAGE>
MOSSIMO, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed consolidated balance sheets as of March 31, 1999 (unaudited) and December 31, 1998....................... 2
Condensed consolidated statements of operations for the three months
ended March 31, 1999 and 1998 (unaudited) ..................................................................... 3
Condensed consolidated statements of cash flows for the three months
ended March 31, 1999 and 1998 (unaudited) ..................................................................... 4
Notes to condensed consolidated financial statements .............................................................. 5
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations .................... 8
PART II - OTHER INFORMATION
ITEM 2 - Legal Proceedings ........................................................................................ 12
ITEM 6 - Exhibits and Reports on Form 8-K ......................................................................... 12
SIGNATURES ........................................................................................................ 13
INDEX TO EXHIBITS ................................................................................................. 14
</TABLE>
<PAGE>
MOSSIMO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------ ------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash .................................................................... $ 317 $ 176
Accounts receivable, net ................................................ 559 979
Due from factor, net .................................................... 5,282 3,064
Refundable taxes ........................................................ -- 171
Inventories ............................................................. 6,454 8,325
Prepaid expenses and other current assets ............................... 347 202
-------- --------
Total current assets .................................................. 12,959 12,917
PROPERTY AND EQUIPMENT, net ............................................... 3,922 4,207
OTHER ASSETS .............................................................. 199 235
-------- --------
$ 17,080 $ 17,359
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit .......................................................... $ 6,102 $ 4,759
Accounts payable ........................................................ 1,509 1,505
Accrued liabilities ..................................................... 1,625 1,834
Current portion of long-term debt ....................................... 16 21
S distribution note ..................................................... 260 266
-------- --------
Total current liabilities ............................................. 9,512 8,385
DEFERRED ROYALTY INCOME ................................................... 288 325
LONG-TERM DEBT, net of current portion .................................... 7 10
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.001; authorized
shares 3,000,000, no shares issued or outstanding ..................... -- --
Common stock, par value $.001; authorized shares
30,000,000, issued and outstanding
15,036,597 - March 31, 1999 and 15,011,529 - December 31, 1998 ........ 15 15
Additional paid-in capital .............................................. 31,613 31,428
Accumulated deficit ..................................................... (24,355) (22,804)
-------- --------
Total stockholders' equity ............................................ 7,273 8,639
-------- --------
$ 17,080 $ 17,359
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
MOSSIMO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
1999 1998
------ ------
(UNAUDITED)
<S> <C> <C>
Net sales ............................................................................ $ 8,286 $ 14,436
Cost of sales ........................................................................ 6,278 10,688
-------- --------
Gross profit ..................................................................... 2,008 3,748
Royalty income, net .................................................................. 1,308 1,109
-------- --------
3,316 4,857
-------- --------
OPERATING EXPENSES:
General and administrative ....................................................... 1,686 2,972
Selling .......................................................................... 942 1,975
Marketing ........................................................................ 1,414 577
Design ........................................................................... 691 774
-------- --------
Total operating expenses ..................................................... 4,733 6,298
-------- --------
Operating loss ............................................................... (1,417) (1,441)
-------- --------
OTHER EXPENSE:
Other, net ....................................................................... (3) (48)
Interest, net .................................................................... (131) (178)
-------- --------
Net other expense ............................................................ (134) (226)
-------- --------
Net loss ............................................................................. $ (1,551) $ (1,667)
-------- --------
-------- --------
Net loss per common share
Basic and diluted................................................................$ (.10) $ (.11)
-------- --------
-------- --------
Weighted average common shares outstanding
Basic and diluted ................................................................ 15,021 15,009
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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MOSSIMO, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
1999 1998
------ ------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................. $ (1,551) $ (1,667)
Adjustment to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization................................................... 340 560
Loss on disposition of property and equipment.................................... - 48
Provision for doubtful receivables............................................... 20 15
Non cash compensation expense.................................................... 75 -
Changes in:
Accounts receivable.......................................................... 400 (470)
Due from factor.............................................................. (2,218) (6)
Refundable taxes............................................................. 171 5,159
Inventories.................................................................. 1,871 1,261
Prepaid expenses and other current assets.................................... (145) (27)
Other assets................................................................. (7) (51)
Accounts payable............................................................. 4 (1,831)
Accrued liabilities.......................................................... (209) (94)
-------- --------
Net cash provided by (used in) operating activities.......................... (1,249) 2,897
-------- --------
CASH FLOWS FROM INVESTING ACTIVITY :
Payments for acquisition of property and equipment................................... (55) (221)
-------- --------
Net cash used in investing activities........................................ (55) (221)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES :
Net change in line of credit......................................................... 1,343 (2,938)
Repayment of long-term debt......................................................... (8) (10)
Proceeds from issuance of common stock.............................................. 110 31
-------- --------
Net cash provided by (used in) financing activities......................... 1,445 (2,917)
-------- --------
NET CHANGE IN CASH.................................................................. 141 (241)
CASH, beginning of period........................................................... 176 655
-------- --------
CASH, end of period................................................................. $317 $ 414
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.................................................................... $ 135 $ 123
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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MOSSIMO, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Accounting Policies
- -----------------------------------------
Mossimo, Inc. ("Mossimo" or the "Company") designs, sources and markets a
lifestyle collection of designer men's and women's sportswear and activewear
bearing Mossimo(R) trademarks that project the Company's image of a contemporary
lifestyle. The Company's apparel offerings include knit and woven shirts,
outerwear, denim products, sweatshirts, tee-shirts and shorts. The Company also
designs, sources and markets men's and women's eyewear, and licenses its
trademarks for use in collections of women's swimwear and bodywear, men's
neckwear, men's and women's accessories, men's tailored suits and dress shirts
and men's hosiery. Mossimo products are characterized by quality workmanship and
are targeted towards the fashion conscious consumer generally age 35 or under.
The Company distributes its products to a diversified account base, including
department stores, specialty retailers, and sports and activewear stores located
throughout the United States, as well as one signature retail store and one
outlet store in Southern California.
The accompanying unaudited interim condensed consolidated financial
statements of the Company have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") for reporting on
Form 10-Q. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles ("GAAP") for complete
financial statements. The accompanying unaudited interim condensed consolidated
financial statements should be read in conjunction with the Company's
consolidated financial statements for the year ended December 31, 1998 on Form
10-K.
In the opinion of management, the unaudited condensed consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the consolidated
balance sheets as of March 31, 1999 and December 31, 1998, and the consolidated
statements of operations and cash flows for the three months ended March 31,
1999 and 1998. Operating results for the three months ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the entire
fiscal year ending December 31, 1999.
Certain reclassifications have been made in the condensed consolidated 1998
financial statements to conform to the 1999 presentation.
Effective fiscal 1997, the Company adopted Statements of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share". As required, the
Company's financial statements include net income per share assuming no dilution
from outstanding options and net income per share assuming dilution. Prior
period net income per share data was restated for consistency. The impact of
SFAS No. 128 did not materially change the Company's reported results of
operations. For the three months ended March 31, 1999 and 1998, there was no
dilution from outstanding options.
During 1998, the Company issued stock options to Edwin Lewis under the
Stock Option Plan for Edwin Lewis. The shares of common stock to be issued upon
exercise of these options will be contributed to the Company by Mossimo
Giannulli under a Contribution Agreement. Accordingly, these shares are included
in basic weighted average shares outstanding as of March 31, 1999.
5
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As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which establishes standards for the reporting and display
of comprehensive income and its components in the financial statements. There
are no items of comprehensive income (loss) that the Company is required to
report.
2. Credit Facility
- --------------------
The Company maintains a $15.0 million revolving credit line, collateralized
by inventory, receivables, machinery and equipment and intangibles, bearing
interest at the prime rate plus 0.5%. The Company's borrowings under the amended
agreement are limited to 50% of eligible inventory and 85% of eligible
receivables. The facility allows for up to $6 million in letters of credit. In
March 1999, the agreement was amended to commit the revolving line of credit
through April 1, 2000 and to allow the Company to borrow amounts in excess of
its advance rates in varying monthly amounts from approximately $1.5 million to
$5.5 million. The amendment also extends the factoring agreement and the line of
credit through June 30, 2002.
Historically, the Company has sold a substantial portion of its trade
accounts receivable to a factor, which assumes the credit risk with respect to
collection of nonrecourse accounts receivable in exchange for a fee. The factor
approves the credit of the Company's customers prior to sale. If the factor
disapproves of a sale to a customer and the Company decides to proceed with the
sale, the Company bears the credit risk. The factoring agreement continues in
force from year to year and may be terminated by the Company on June 30, 2002
with 60 days prior written notice or by the factor at any time after April 1,
2000, with 180 days prior written notice.
3. Commitments and Contingencies
- ----------------------------------
LITIGATION - On January 23, 1997, plaintiff Chaile Steinberg filed a
purported class action against the Company and certain other defendants on
behalf of individuals who purchased the Company's common stock in the initial
public offering pursuant to the Registration Statement and Prospectus
("Prospectus"), dated February 22, 1996, and on the open market from February
22, 1996 through January 14, 1997 (the "Class Period"). On April 7, 1997, the
plaintiffs Igor Glaudnikov, Cara Debra Marks and Lois Burke filed a second
related action against the same defendants. The two cases were subsequently
consolidated by court order, dated May 19, 1997. Both Steinberg and Glaudnikov
(collectively, the "State Actions") contain identical factual allegations, and
only differ in the number of shares purchased by plaintiffs and the California
residence of two of the plaintiffs in the Glaudnikov action.
The State Actions allege that defendants made false and misleading
statements and intentionally concealed material negative information in the
Prospectus and afterward during the Class Period, which artificially inflated
prices for the Company's common stock. Plaintiffs contend that the class was
damaged in an unspecified amount as a result of this artificial inflation of the
Company's stock price.
On September 23, 1997, a federal class action complaint was filed on behalf
of plaintiff James Frenkil by the same law firm that represents the plaintiffs
in the State Actions. One of the named plaintiffs in the federal action is a
plaintiff in the State Actions. The class period and precipitating events are
the same as in the State Actions, but the federal complaint purports to allege
violations of certain federal securities laws. On October 17, 1997, the judge
stayed the federal action pending resolution of the State Actions.
Defendants filed a demurrer in the State Actions, challenging the legal
sufficiency of the complaints. On June 26, 1997, the judge sustained the
defendants' general demurrer to the complaints in the State Actions, finding
that neither complaint pleaded facts sufficient to constitute causes of action
against the defendants. The judge sustained the demurrer as to four of the
causes of action with leave to amend, and as to the fifth cause of action for
unlawful, unfair or fraudulent business practices and false or misleading
advertising without leave to amend.
On July 9, 1998, plaintiffs filed their first amended consolidated
complaint against the same defendants, alleging three causes of action. On
September 22, 1998, defendants filed a general demurer to the first amended
consolidated complaint. On March 16, 1999, the judge sustained the demurrer as
to the Company with respect to
6
<PAGE>
two of the three causes of action with leave to amend. As to the third cause
of action, the judge sustained the demurrer as to the Company with respect to
three of the five plaintiffs with leave to amend, and overruled the demurrer
with respect to the other two plaintiffs. On April 14, 1999, plaintiffs filed
their second amended consolidated complaint, alleging one cause of action.
Defendants have until May 19, 1999, to respond to the second amended
consolidated complaint.
Although the outcome of the litigation cannot be predicted, management
believes that the Company has meritorious defenses to the claims alleged and
intends to defend this action with vigor.
The Company is involved in certain other legal and administrative
proceedings and threatened legal and administrative proceedings arising in the
normal course of its business. While the outcome of such proceedings and
threatened proceedings cannot be predicted with certainty, in the opinion of
management, the ultimate resolution of these matters individually or in the
aggregate will not have a material adverse effect on the Company.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion includes the operations of Mossimo, Inc. for each
of the periods discussed. This discussion and analysis should be read in
conjunction with the Company's consolidated financial statements for the year
ended December 31, 1998 on Form 10-K.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Net sales decreased to $8.3 million during the first quarter of 1999 from
$14.4 million in the corresponding quarter in 1998. The decrease in net sales
was primarily due to a 25% decline in men's sales and a 34% decline in women's
sales. Net sales of the men's line, which represented 59% of the Company's net
sales for the three months ended March 31, 1999, decreased to $4.9 million in
the first quarter of 1999 from $6.4 million in the corresponding quarter in
1998. Net sales of the women's line, which represented approximately 37% of the
Company's net sales for the three months ended March 31, 1999, decreased to $3.1
million in the first quarter of 1999 from $4.6 million in the corresponding
quarter in 1998. The decrease in net sales of the men's and women's line in 1999
was primarily due to narrower product lines and the reduction of unprofitable
accounts. In addition, the Moss line was discontinued during 1998 resulting in a
$1.4 million decrease in net sales of Moss line products during the first
quarter of 1999 compared to the first quarter of 1998. During the second quarter
of of 1998, the Company also discontinued operations of its screen printing
business which contributed $892,000 of net sales in the first quarter of 1998.
Net sales of the Company's eyewear decreased approximately 92% to $44,000 in the
first quarter of 1999 from $521,000 in the same period last year. The decline
was due to the discontinuation of the Optics line, a product category the
Company intends to license.
Gross profit decreased to $2.0 million during the first quarter of 1999
from $3.7 million in the corresponding quarter in 1998. Gross profit as a
percentage of net sales decreased to 24% in 1999 from 26% in the first quarter
of 1998. The decrease resulted primarily from an increase in sales of prior
season inventory to discount channels.
Royalty income increased to $1.3 million in the first quarter of 1999 from
$1.1 million in the corresponding quarter in 1998. The increase was primarily
attributed to increased sales by foreign licensees and the Company's swimwear
and bodywear licensee.
Operating expenses decreased to $4.7 million in the first quarter of 1999
from $6.3 million in the corresponding quarter of 1998. General and
administrative expense decreased to $1.7 million in the first quarter of 1999
compared to $3.0 million in the corresponding quarter of 1998 primarily due to
reduced staffing, reduced rent expense and overall cost cutting measures.
Selling expense decreased to $0.9 million in the first quarter of 1999 from $2.0
million in the corresponding quarter of 1998 due to reduced sales commissions
and the elimination of certain trade shows. Marketing expense increased to $1.4
million in the first quarter of 1999 from $0.6 million in the corresponding
quarter of 1998 primarily due to an increase in print advertising. Design
expense remained relatively consistent at $0.7 million in the first quarter of
1999 compared to $0.8 million in the corresponding quarter in 1998.
The Company had net interest expense of $131,000 in the first quarter of
1999 compared to net interest expense of $178,000 in the corresponding quarter
in 1998. In 1998, the Company paid additional fees associated with continuing
the revolving line of credit.
The Company recorded no tax benefit in the three months ended March 31,
1999 and 1998 as a result of its pretax loss. Losses for the three months ended
March 31, 1999 and 1998 were not benefited due to carryback limitations and
uncertainty regarding realization of the related deferred tax asset.
8
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are to fund their working capital
needs related to inventories, accounts receivable and property and equipment
acquisitions. Net cash used in operating activities totaled approximately $1.2
million for the three months ended March 31, 1999. Cash utilized in operating
activities was comprised primarily of the Company's net loss of $1.5 million, an
increase of $1.8 million in receivables, offset by a $1.9 million reduction in
inventory. At March 31, 1999, working capital was approximately $3.4 million as
compared to $4.5 million at December 31, 1998. The decline in working capital is
due primarily to a $1.9 million decrease in inventory and a $1.3 million
increase in the line of credit offset by a $1.8 million increase in receivables
in the first quarter of 1999.
The Company maintains a $15.0 million revolving credit line, which is
collateralized by inventory, receivables, machinery and equipment and
intangibles, bearing interest at the prime rate plus 0.5%. The Company's
borrowings under the facility agreement are limited to 50% of eligible inventory
and 85% of eligible receivables. The facility allows for up to $6 million in
letters of credit. In March 1999, the agreement was amended to commit the
revolving line of credit through April 1, 2000 and to allow the Company to
borrow amounts in excess of its advance rates in varying monthly amounts from
approximately $1.5 million to $5.5 million. The amendment also extends the
factoring agreement and the line of credit through June 30, 2002.
Historically, the Company has sold a substantial portion of its trade
accounts receivable to a factor, which assumes the credit risk with respect to
collection of nonrecourse accounts receivable in exchange for a fee. The factor
approves the credit of the Company's customers prior to sale. If the factor
disapproves of a sale to a customer and the Company decides to proceed with the
sale, the Company bears the credit risk. The factoring agreement continues in
force from year to year and may be terminated by the Company on June 30, 2002
with 60 days prior written notice or by the factor at any time after April 1,
2000, with 180 days prior written notice.
The Company believes that current cash and their revolving line of credit
will be sufficient to meet its anticipated cash needs for at least the next 12
months. However, any projections of future cash needs and cash flows are subject
to substantial uncertainty. There can be no assurance that financing will be
available in amounts or on terms acceptable to the Company, if at all.
SEASONALITY
The Company's business is impacted by general seasonal trends that are
characteristic of the many companies in the apparel industry. However, due
primarily to the declining sales experienced in 1997 and 1998, past quarterly
sales and operating trends have not reflected the normal apparel industry
seasonality. In future years, the Company expects that its sales may reflect
greater seasonal trends.
FORWARD LOOKING INFORMATION
This report on Form 10-Q contains certain forward-looking statements within
the meaning of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are based on the beliefs of
the Company's management as well as assumptions made by and information
currently available to the Company's management. The words "anticipate",
"believe", "may", "estimate" and similar expressions, variations of such terms
or the negative of such terms as they relate to the Company or its management
when used in this document are intended to identify such forward-looking
statements. Such statements are based on management's current expectations and
are subject to certain risks, uncertainties and assumptions. Should one or more
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, the Company's actual results, performance or achievements could
differ materially from those expressed in, or implied by such forward-looking
statements.
9
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NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction and, if it is, the type of
hedge transaction. The Company does not expect that the adoption of SFAS No. 133
will have a material impact on its consolidated financial statements because the
Company does not currently hold any derivative instruments.
YEAR 2000
GENERAL
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The Company's
computer equipment and software and devices with embedded technology that are
date-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, and engage in similar normal business
activities.
The Company has assessed how it may be impacted by the Year 2000 issue and
has formulated and commenced implementation of a plan to address the known
aspects of the issue.
THE PLAN
The Company's plan encompasses its information systems, production and
facilities equipment that utilize date/time oriented software of computer chips,
products, vendors and customers and will be carried out in four phases: 1)
assessment and development of a plan; 2) remediation; 3) testing; and 4)
implementation.
With regard to information systems, production and facilities equipment and
products, the Company is substantially complete with the assessment and plan
development phase and is approximately 95% complete with its total planned
efforts including remediation, testing and implementation. The Company expects
that its remediation efforts in these areas will be substantially completed by
July 1999.
The Company is also reviewing the efforts of its vendors and customers to
become Year 2000 compliant. The Company has divided these vendors and customers
into several groups such as financial institutions, software and system
suppliers, critical customers and manufacturers. Each group was reviewed based
on its level of technological dependence, frequency of interactions and need by
the Company to continue operations. The Company has received approximately 95%
of the responses from the more technologically dependent vendors and customers,
of which 100% responded with written assurances that they expect to address all
of their known significant Year 2000 issues on a timely basis. The Company is
currently contacting its remaining vendors and customers to ensure that they are
Year 2000 compliant. The Company anticipates that these activities will be
on-going for the remainder of 1999 and will include follow-up telephone
interviews and on-site meetings as considered necessary in the circumstances.
Although this review is continuing, the Company is not currently aware of any
vendor or customer circumstances that may have a material adverse impact on the
Company. The Company will be seeking alternative suppliers if possible where
circumstances warrant. The Company can provide no assurance that Year 2000
compliance plans will be successfully completed by suppliers and customers in a
timely manner.
10
<PAGE>
COST
The Company has incurred less than $30,000 related to Year 2000 compliance
and does not anticipate additional expenditures in excess of $30,000 to complete
the Year 2000 compliance process. Existing maintenance agreements with the
software providers covered the majority of costs related to the upgrade of its
internal accounting and proprietary business software. These systems were
upgraded in December of 1998. The Company believes that necessary conversions of
other operational systems can also be accomplished through vendor upgrades and
enhancements as provided under its system maintenance agreements currently in
effect.
RISK
The Company believes that the Year 2000 issue will not pose significant
operational problems for the Company. However, if all Year 2000 issues are not
properly identified, or assessment, remediation and testing are not affected in
a timely manner with respect to problems that are identified, there can be no
assurance that the Year 2000 issue will not have a material adverse impact on
the Company's results of operations or adversely affect the Company's
relationships with customers, vendors, or others. Additionally, there can be no
assurance that the Year 2000 issues of other entities will not have a material
adverse impact on the Company's systems or results of operations. The Company
will continue to meet on a bi-weekly basis to evaluate the progress of vendors
and customers related to Year 2000 status and compliance.
CONTINGENCY PLAN
The Company has started a comprehensive analysis of the operational
problems and costs (including loss of revenue) that would be reasonably likely
to result from the failure by the Company and certain third parties to complete
efforts necessary to achieve Year 2000 compliance on a timely basis. A
contingency plan has not been finalized for dealing with the most reasonably
likely worst case scenario as such scenario has not yet been clearly identified.
The Company is currently undergoing this analysis bi-weekly meetings to
formulate action plans where necessary. Contingency planning is expected to be
completed by July 1999, with ongoing analysis through December 1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not have any derivative financial instruments as of March
31, 1999. Further, the Company is not exposed to interest rate risk as the
Company's revolving line of credit and factoring agreement have variable
interest rates. Therefore, the fair value of these instruments are not affected
by changes in market interest rates. The Company believes that the market risk
arising from holdings of its financial instruments is not material.
11
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PART II - OTHER INFORMATION
ITEM 2 - LEGAL PROCEEDINGS (See Note 4 to Financial Statements)
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
3.1 Articles of Incorporation of the Company*
3.2 Bylaws of the Company*
10.4.5 Letter Amendment to Factoring Agreement dated March 22,
1999
10.7.2 Amendment to the Financing Agreement dated March 22, 1999
27 Financial Data Schedule
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the
three months ended March 31, 1999.
* (Incorporated by reference from the Company's Registration
Statement on Form S-1, File Number 33-80597)
12
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Mossimo, Inc.
May 7, 1999 /s/ Edwin H. Lewis
---------------------------
Edwin H. Lewis
Chief Executive Officer and President
May 7, 1999 /s/ Thora Thoroddsen
---------------------------
Thora Thoroddsen
Secretary, Treasurer and Senior Vice
President Finance (Principal Accounting
Officer)
13
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- -------------------------------------------------------------------------------
3.1 Articles of Incorporation of the Company*
3.2 Bylaws of the Company*
10.4.5 Letter Amendment to Factoring Agreement dated March 22, 1999
10.7.2 Amendment to the Financing Agreement dated March 22, 1999
27 Financial Data Schedule
* (Incorporated by reference from the Company's Registration Statement
on Form S-1, File Number 33-80597)
14
<PAGE>
[LOGO]
March 22, 1999
MOSSIMO, INC.
2450 White Road
Irvine, CA 92614
Gentlemen:
Reference is made to the Factoring Agreement between us dated January 2, 1990
(as amended, supplemented, or otherwise modified, the "Agreement").
Pursuant to mutual understanding, effective March 22, 1999, the Agreement is
amended to provide as follows:
The fourth sentence of Paragraph 17 shall be deleted and replaced by the
following:
"AS USED HEREIN, THE TERM "ANNIVERSARY DATE" SHALL MEAN JUNE 30, 2002 AND
THE SAME DATE IN EVERY YEAR THEREAFTER"
Except as herein specifically provided, no other change in the terms or
provisions of the Agreement is intended or implied. If the foregoing is in
accordance with your understanding of our Agreement, please indicate by
signing and returning the enclosed copy of this letter to so indicate.
Very truly yours,
THE CIT GROUP/
COMMERCIAL SERVICES, INC.
By: /s/ James Ezemoll, V.P.
----------------------------
James Ezemoll, Vice President
Read and Agreed to:
MOSSIMO, INC.
By: /s/ Thora Thoroddsen
----------------------------
Name: Thora Thoroddsen
Title: SR VP of Finance
<PAGE>
SECOND AMENDMENT TO FINANCING AGREEMENT
This Second Amendment to Financing Agreement, dated and effective as of
March 22, 1999 ("Second Amendment"), amends that certain Financing Agreement,
dated July 15, 1997 (as amended, the "Agreement") entered into by and between
The CIT Group/Commercial Services, Inc. ("CIT") and Mossimo, Inc. (the
"Company"). Except as defined herein, terms defined in the Agreement shall
have the same meaning when used in this Second Amendment.
For good and valuable consideration, the Company and CIT agree as
follows:
1. The definition of "Anniversary Date" set forth in Section 1 of the
Agreement is hereby deleted in its entirety, and the following is
inserted in lieu thereof:
"ANNIVERSARY DATE shall mean June 30, 2000 and the same date in every
year thereafter."
2. The definition of "Termination Premium" is hereby amended by deleting
the amount of "$20,000,000.00" set forth therein, and inserting in lieu
thereof the amount of "$15,000,000.00".
3. Paragraphs 11 and 12 of Section 7 of the Agreement are hereby deleted in
their entirety, and the following are inserted in lieu thereof:
"11. The Company's EBITDA for the fiscal periods set forth below shall
not be less than:
<TABLE>
<CAPTION>
Fiscal Period EBITDA
------------- ------
<S> <C>
Fiscal Period Ending March 31, 1999 ($1,803,000.00)
Fiscal Period Ending June 30, 1999 ($1,973,000.00)
Fiscal Period Ending September 30, 1999 ($ 142,000.00)
Fiscal Period Ending December 31, 1999 ($4,760,000.00)
The Company's EBITDA for fiscal periods
ending subsequent to December 31, 1999
will be established annually after CIT's
receipt from the Company (no later than
September 30th of each year) of the
Company's internally prepared cash flow
projections for the following fiscal year.
</TABLE>
<PAGE>
11. The Company's exposure in excess of Accounts Receivable Availability for
the fiscal months set forth below shall not exceed:
<TABLE>
<CAPTION>
Exposure in Excess of Accounts
Fiscal Months Receivable Availability
-------------
<S> <C>
March 1999 ($ 5,431,000.00)
April 1999 ($ 7,790,000.00)
May 1999 ($11,911,000.00)
June 1999 ($11,970,000.00)
July 1999 ($ 9,911,000.00)
August 1999 ($ 8,977,000.00)
September 1999 ($ 9,671,000.00)
October 1999 ($ 8,961,000.00)
November 1999 ($ 7,676,000.00)
December 1999 ($ 3,659,000.00)
The Company's exposure in excess of Accounts
Receivable Availability for fiscal months
ending subsequent to December 1999 will be
established annually after CIT's receipt from
the Company (no later than September 30th of
each year) of the Company's internally prepared
cash flow projections for the following fiscal
year."
</TABLE>
4. The Company hereby agrees to pay and authorizes CIT to charge to the
Company's account a fee of $25,000.00 in connection with the changed
terms and conditions reflected in this Agreement.
5. Except as expressly modified by the Second Amendment, the Agreement and
related documents shall remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Second Amendment to be duly
executed and delivered by their proper and duly authorized officers as of the
day and year above written.
MOSSIMO, INC. THE CIT GROUP/COMMERCIAL SERVICES, INC.
By: /s/ Thora Thoroddsen By: /s/ James Ezemoll
-------------------------- --------------------------
Title: SR VP of Finance Title: V.P.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 317
<SECURITIES> 0
<RECEIVABLES> 7,229
<ALLOWANCES> 1,388
<INVENTORY> 6,454
<CURRENT-ASSETS> 12,959
<PP&E> 7,472
<DEPRECIATION> 3,550
<TOTAL-ASSETS> 17,080
<CURRENT-LIABILITIES> 9,512
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 7,258
<TOTAL-LIABILITY-AND-EQUITY> 17,080
<SALES> 8,286
<TOTAL-REVENUES> 9,594
<CGS> 6,278
<TOTAL-COSTS> 6,278
<OTHER-EXPENSES> 4,733
<LOSS-PROVISION> 20
<INTEREST-EXPENSE> 131
<INCOME-PRETAX> (1,551)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,551)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,551)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
